FY 2007 U.S. Department of Justice Annual Financial Statements

Notes to the Financial Statements
(Dollars in Thousands, Except as Noted)

Note 1. Summary of Significant Accounting Policies

A. Reporting Entity

The Department of Justice (Department) has a wide range of responsibilities which include: detecting, apprehending, prosecuting, and incarcerating criminal offenders; operating federal prison factories; upholding the civil rights of all Americans; enforcing laws to protect the environment; ensuring healthy competition of business in the United States’ free enterprise system; safeguarding the consumer from fraudulent activity; carrying out the immigration laws of the United States; and representing the American people in all legal matters involving the U.S. Government. Under the direction of the Attorney General, these responsibilities are discharged by the components of the Department.

For purposes of these consolidated/combined financial statements, the following components comprise the Department=s reporting entity:

• Assets Forfeiture Fund and Seized Asset Deposit Fund (AFF/SADF)
• Offices, Boards and Divisions (OBDs)
• U.S. Marshals Service (USMS)
• Office of Justice Programs (OJP)
• Drug Enforcement Administration (DEA)
• Federal Bureau of Investigation (FBI)
• Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF)
• Bureau of Prisons (BOP)
• Federal Prison Industries, Inc. (FPI)

Beginning fiscal year (FY) 2007, the data and transactions of the Working Capital Fund (WCF), which was previously reported as a separate entity, are included in the comparative financial statements of the OBDs.

B. Basis of Presentation

These financial statements have been prepared from the books and records of the Department in accordance with United States generally accepted accounting principles issued by the Federal Accounting Standards Advisory Board (FASAB) and presentation guidelines in the Office of Management and Budget (OMB) Circular A-136, “Financial Reporting Requirements.” These financial statements are different from the financial reports prepared pursuant to OMB directives which are used to monitor and control the use of the Department=s budgetary resources. The accompanying financial statements include the accounts of all funds under the Department=s control. To ensure that the Department financial statements are meaningful at the entity level and to enhance reporting consistency within the Department, Other Assets and Other Liabilities as defined by OMB Circular A-136 have been disaggregated on the balance sheet. These included Forfeited Property, Net, Advances and Prepayments, Accrued Federal Employees’ Compensation Act Liabilities, Custodial Liabilities, Actuarial Federal Employees’ Compensation Act Liabilities, Accrued Payroll and Benefits, Accrued Annual and Compensatory Leave Liabilities, Deferred Revenue, Seized Cash and Monetary Instruments, Contingent Liabilities, Capital Lease Liabilities, and Radiation Exposure Compensation Act Liabilities.

FPI, a reporting component of the Department of Justice, operates as a government corporation and does not receive annual appropriations. The budgetary accounting data is presented to best represent the budget activity of FPI based solely on proprietary accounting data.

C. Basis of Consolidation

The consolidated/combined financial statements of the Department include the accounts of the AFF/SADF, OBDs, USMS, OJP, DEA, FBI, ATF, BOP, and FPI. All significant proprietary intra-departmental transactions and balances have been eliminated in consolidation. The Statements of Budgetary Resources and Statements of Custodial Activity are combined statements for FYs 2007 and 2006, and as such, intra-departmental transactions have not been eliminated. /p>

D. Basis of Accounting

Transactions are recorded on the accrual and budgetary basis of accounting. Under the accrual basis, revenues are recorded when earned and expenses are recorded when incurred, regardless of when cash is exchanged. Under the budgetary basis, however, funds availability is recorded based upon legal considerations and constraints. As a result, certain line items on the proprietary financial statements may not equal similar line items on the budgetary financial statements.

Custodial activity reported on the Combined Statement of Custodial Activity is prepared on the modified cash basis. Civil and Criminal Debt Collections are recorded when the Department receives payment from debtors. Accrual adjustments are made related to collections of fees and licenses.

The financial statements should be read with the realization that they are for a component of the U.S. Government, a sovereign entity. One implication of this is that liabilities cannot be liquidated without legislation that provides resources and legal authority to do so.

E. Non-Entity Assets

Non-entity assets are not available for use by the Department and consist primarily of restricted undisbursed civil and criminal debt collections, seized cash, accounts receivable, and other monetary assets.

F. Fund Balance with U.S. Treasury and Cash

Funds with the Treasury represent primarily appropriated, revolving, and trust funds available to pay current liabilities and finance future authorized purchases. The Treasury, as directed by authorized certifying officers, processes cash receipts and disbursements. The Department does not, for the most part, maintain cash in commercial bank accounts. Certain receipts, however, are processed by commercial banks for deposit into individual accounts maintained at the Treasury. The Department=s cash and other monetary assets consist of undeposited collections, imprest funds, cash used in undercover operations, cash held as evidence, and seized cash.

G. Investments

Investments are market-based Treasury securities issued by the Bureau of Public Debt. When securities are purchased, the investment is recorded at face value (the value at maturity). Premiums and/or discounts are amortized through the end of the reporting period. The Department=s intent is to hold investments to maturity, unless securities are needed to sustain operations. No provision is made for unrealized gains or losses on these securities because, in the majority of cases, they are held to maturity. The market value of the investments is the current market value at the end of the reporting period. It is calculated by using the “End of Day” price listed in The FedInvest Price File which can be found on the Bureau of Public Debt website (http://www.fedinvest.gov/).

The Assets Forfeiture Fund, the U.S. Trustee System Fund and the Federal Prison Commissary Fund are three earmarked funds that invest in Treasury securities. The Treasury does not set aside assets to pay future expenditures associated with earmarked funds. Instead, the cash generated from earmarked funds is used by the Treasury for general Government purposes. When these earmarked funds redeem their Treasury securities to make expenditures, the Treasury will finance the expenditures in the same manner that it finances all other expenditures. Treasury securities held by an earmarked fund are an asset of the fund and a liability of the Treasury, so they are eliminated in consolidation for the U.S. Government-wide financial statements.

H. Accounts Receivable

Net accounts receivable includes reimbursement and refund receivables due from federal agencies and others, less the allowance for doubtful accounts. Generally, most intragovernmental accounts receivable are considered fully collectible. The allowance for doubtful accounts for public receivables is estimated based on past collection experience and analysis of outstanding receivable balances at year end.

I. Inventory and Related Property

Inventories consist of new and rehabilitated office furniture, equipment and supplies used for the repair of airplanes, administrative supplies and materials, commission sales to inmates (sundry items), metals, plastics, electronics, graphics, and optics.

The value of new stock is determined on the basis of acquisition cost, whereas, the value of rehabilitated stock is determined on the basis of rehabilitation and transportation costs. Inventory on hand at year end is reported at the lower of original cost (using the first-in, first-out method) or current market value. Recorded values of inventories are adjusted for the results of physical inventories conducted throughout and at the close of the fiscal year.

An allowance for inventory valuation and obsolescence is recorded for anticipated inventory losses of contracts where the current estimated cost to manufacture the item exceeds the total sales price, as well as estimated losses for inventories that may not be utilized in the future.

J. General Property, Plant and Equipment

Real property, except for land, and leasehold improvements are capitalized when the cost of acquiring and/or improving the asset is $100 or more and the asset has a useful life of two or more years. Land is capitalized regardless of the acquisition cost. Real property is depreciated, based on historical cost, using the straight-line method over the estimated useful lives of the assets.

Except for BOP and FPI, Department acquisitions of personal property, excluding internal use software, $25 and over are capitalized if the asset has an estimated useful life of two or more years. Personal property is depreciated, based on historical cost, using the straight-line method over the estimated useful lives of the assets. BOP and FPI capitalize personal property acquisitions over $5.

Internal use software is capitalized when developmental phase costs or enhancement costs are $500 or more and the asset has an estimated useful life of two or more years. Aircraft are capitalized when the initial cost of acquiring those assets is $100 or more.

K. Advances and Prepayments

Advances and prepayments, classified as assets on the Consolidated Balance Sheets, consist primarily of funds disbursed to grantees in excess of total expenditures made by those grantees to third parties, funds advanced to state and local participants in the DEA Domestic Cannabis Eradication and Suppression Program, and travel advances issued to federal employees for official travel. Travel advances are limited to meals and incidental expenses expected to be incurred by the employees during official travel. Payments in advance of the receipt of goods and services are recorded as prepaid charges at the time of payment and are recognized as expenses when the goods and services are received.

L. Forfeited and Seized Property

Forfeited property is property for which the title has passed to the U.S. Government. This property is recorded at the estimated fair market value at the time of forfeiture. The value of the property is reduced by the estimated liens of record.

Property is seized in consequence of a violation of public law. Seized property can include monetary instruments, real property, and tangible personal property of others in the actual or constructive possession of the custodial agency. Most non-cash property is held by the USMS from the point of seizure until its disposition. This property is recorded at the estimated fair market value at the time of seizure.

M. Liabilities

Liabilities represent the monies or other resources that are likely to be paid by the Department as the result of a transaction or event that has already occurred. However, no liability can be paid by the Department absent proper budget authority. Liabilities that are not funded by the current year appropriation are classified as liabilities not covered by budgetary resources in Note 11.

On October 15, 1990, Congress passed the Radiation Exposure Compensation Act (RECA), 42 U.S.C. § 2210 note (1990), providing for compassionate payments to individuals who contracted certain cancers and other serious diseases as a result of their exposure to radiation released during above-ground nuclear weapons tests or as a result of their exposure to radiation during employment in underground uranium mines. The September 30, 2007 and 2006 estimated liabilities are based on historical data collected since the Program commenced operations in 1992, and management’s assumptions concerning receipt and approval of claims in the future. Key factors in determining liability are the number of claims filed, the number of claims approved, and estimates for these factors through FY 2022. These estimates are then discounted in accordance with the discount rates set by OMB.

Congress granted the FPI borrowing authority pursuant to Public Law 100-690. Under this authority, the FPI borrowed $20,000 from the Treasury with a lump-sum maturity date of September 30, 2008.

N. Contingencies and Commitments

The Department is involved in various legal actions, including administrative proceedings, lawsuits, and claims. A liability is generally recognized as an unfunded liability for those legal actions where unfavorable decisions are considered “probable” and an estimate for the liability can be made. Contingent liabilities that are considered both “probable” and “reasonably possible” are disclosed in Note 17. Liabilities that are considered “remote” are not recognized in the financial statements or disclosed in the notes to the financial statements.

O. Annual, Sick, and Other Leave

Annual and compensatory leave is expensed with an offsetting liability as it is earned and the liability is reduced as leave is taken. Each year, the balance in the accrued annual leave liability account is adjusted to reflect current pay rates. To the extent current or prior year appropriations are not available to fund annual and compensatory leave earned but not taken, funding will be obtained from future financing sources. Sick leave and other types of nonvested leave are expensed as taken.

P. Interest on Late Payments

Pursuant to the Prompt Payment Act, 31 U.S.C. ' 3901 3907, the Department pays interest on payments for goods or services made to business concerns after the due date. The due date is generally 30 days after receipt of a proper invoice or acceptance of the goods or services, whichever is later.

Q. Retirement Plan

With few exceptions, employees hired before January 1, 1984 are covered by the Civil Service Retirement System (CSRS) and employees hired on or after that date are covered by the Federal Employees Retirement System (FERS). For employees covered by CSRS, the Department contributes 7% of the employees= gross pay for regular and 7.5% for law enforcement officers’ retirement. For employees covered by FERS, the Department contributes 11.2% of employees= gross pay for regular and 23.8% for law enforcement officers’ retirement. All employees are eligible to contribute to the Federal Thrift Savings Plan (TSP). For those employees covered by the FERS, a TSP account is automatically established to which the Department is required to contribute an additional 1% of gross pay and match employee contributions up to 4%. No contributions are made to the TSP accounts established by the CSRS employees. The Department does not report CSRS or FERS assets, accumulated plan benefits, or unfunded liabilities, if any, which may be applicable to its employees. Such reporting is the responsibility of the Office of Personnel Management (OPM). Statement of Federal Financial Accounting Standards (SFFAS) No. 5, “Accounting for Liabilities of the Federal Government,” requires employing agencies to recognize the cost of pensions and other retirement benefits during their employees= active years of service. Refer to Note 20, “Imputed Financing from Costs Absorbed by Others,” for additional details.

R. Federal Employee Compensation Benefits

The Federal Employees’ Compensation Act (FECA) provides income and medical cost protection to covered federal civilian employees injured on the job, employees who have incurred a work related occupational disease, and beneficiaries of employees whose death is attributable to a job related injury or occupational disease. The total FECA liability consists of an actuarial and an accrued portion as discussed below.

Actuarial Liability: The Department of Labor (DOL) calculates the liability of the federal government for future compensation benefits, which includes the expected liability for death, disability, medical, and other approved costs. The liability is determined using the paid losses extrapolation method calculated over the next 37 year period. This method utilizes historical benefit payment patterns related to a specific incurred period to predict the ultimate payments related to that period. The projected annual benefit payments are discounted to present value. The resulting federal government liability is then distributed by agency. The Department portion of this liability includes the estimated future cost of death benefits, workers' compensation, medical, and miscellaneous cost for approved compensation cases for the Department employees. The Department liability is further allocated to component reporting entities on the basis of actual payments made to the FECA Special Benefits Fund (SBF) for the three prior years as compared to the total Department payments made over the same period.

The FECA actuarial liability is recorded for reporting purposes only. This liability constitutes an extended future estimate of cost, which will not be obligated against budgetary resources until the fiscal year in which the cost is actually billed to the Department. The cost associated with this liability cannot be met by the Department without further appropriation action.

Accrued Liability: The accrued FECA liability is the amount owed to the DOL for the benefits paid from the FECA SBF directly to Department employees.

S. Intragovernmental Activity

These transactions and/or balances result from business activities conducted between two different federal government entities.

T. Revenues and Other Financing Sources

The Department receives the majority of funding needed to support its programs through Congressional appropriations. The Department receives annual, no-year, and multi-year appropriations that may be used, within statutory limits, for operating and capital expenditures. Additional funding is obtained through exchange revenues, nonexchange revenues and transfers-in.

Appropriations are recognized as budgetary financing sources at the time the related program or administrative expenses are incurred. Exchange revenues are recognized when earned, for example, when goods have been delivered or services rendered. Nonexchange revenues are resources that the Government demands or receives, for example, forfeiture revenue and fines and penalties.

The Department=s exchange revenue consists of the following activities: licensing fees to manufacture and distribute controlled substances; services rendered for legal activities; space management; data processing services; sale of merchandise and telephone services to inmates; sale of manufactured goods and services to other federal agencies; and other services. Fees are set by law and are periodically evaluated in accordance with OMB guidance. The pricing policy for FPI goods and services is based on cost plus a predetermined gross margin ratio.

The Department=s nonexchange revenue consists of forfeiture income resulting from the sale of forfeited property, penalties in lieu of forfeiture, recovery of returned asset management cost, judgment collections, and other miscellaneous income. Other nonexchange revenue includes the OJP Crime Victims Fund receipts, ATF taxes and fees from firearms and ammunition industries, and AFF/SADF interest on investments with the Treasury.

The Department=s deferred revenue includes fees received for processing various applications and licenses with DEA for which the process was not completed at the end of fiscal year or for licenses that are valid for multiple years. These monies are recorded as liabilities in the financial statements. Deferred revenue also includes forfeited property held for sale. When the property is sold, deferred revenue is reversed and forfeiture revenue in the amount of the gross proceeds of the sale is recorded.

U. Earmarked Funds

SFFAS No. 27, “Identifying and Reporting Earmarked Funds,” defines ‘Earmarked Funds’ as being financed by specifically identified revenues, often supplemented by other financing sources, which remain available over time. These specifically identified revenues and other financing sources are required by statute to be used for designated activities, benefits or purposes, and must be accounted for separately from the Government’s general revenues. The three required criteria for an Earmarked Fund are:

1. A statute committing the federal Government to use specifically identified revenues and other financing sources only for designated activities, benefits or purposes;
2. Explicit authority for the earmarked fund to retain revenues and other financing sources not used in the current period for future use to finance the designated activities, benefits, or purposes; and
3. A requirement to account for and report on the receipt, use, and retention of the revenues and other financing sources that distinguishes the Earmarked Fund from the Government’s general revenues.

The following funds meet the definition of an Earmarked Fund: Assets Forfeiture Fund, U.S. Trustee System Fund, Antitrust Division, Crime Victims Fund, Diversion Control Fee Account and Federal Prison Commissary Fund.

As an agency of the federal government, the Department is exempt from all taxes imposed by any governing body whether it be a Federal, state, commonwealth, local or foreign government.

The preparation of financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

The FY 2006 financial statements were reclassified to conform to the FY 2007 Departmental financial statement presentation requirements. The reclassifications had no material effect on total assets, liabilities, net position, change in net position or budgetary resources as previously reported.

Note 2.  Non-Entity Assets

As of September 30, 2007 and 2006

Note 3.  Fund Balance with U.S. Treasury

The Fund Balances with U.S. Treasury represent the unexpended balances on the Department's books for all the Department's Treasury Symbols.

As of September 30, 2007 and 2006

Annual and multi-year budget authority expires at the end of its period of availability. During the first through the fifth expired years, the unobligated balance becomes unavailable and may be used to adjust obligations and disbursements that were recorded before the budgetary authority expired or to meet a legitimate or bona fide need arising in the fiscal year for which the appropriation was made. The unobligated balance for no-year budget authority may be used to incur obligations indefinitely for the purpose specified by the appropriation act. No-year budget authority unobligated balances are still subject to the annual apportionment and allotment process.

Other Funds (With)/Without Budgetary Resources primarily represent the net difference of 1) investments in short-term securities with budgetary resources, 2) resources temporarily not available pursuant to public law, 3) custodial liabilities, and 4) miscellaneous receipts.

Note 4.  Cash and Monetary Assets

As of September 30, 2007 and 2006

Note 5.  Investments, Net

Note 6.  Accounts Receivable, Net

As of September 30, 2007 and 2006

The accounts receivable with the public primarily consists of OBDs U.S. Trustee Chapter 11 quarterly fees, FBI Integrated Automated Fingerprint Identification System fees, court mandated restitution, and refunds due from the public

Note 7.  Inventory and Related Property, Net

As of September 30, 2007 and 2006

Note 8.  Forfeited and Seized Property

Equitable Sharing Payments:

The statute governing the use of the AFF (28 U.S.C. '524(c)) permits the payment of equitable shares of forfeiture proceeds to participating foreign governments and state and local law enforcement agencies.  The statute does not require such sharing and permits the Attorney General wide discretion in determining those transfers.  Actual sharing is difficult to predict because many factors influence both the amount and timing of disbursement of equitable sharing payments, such as the length of time required to move an asset through the forfeiture process to disposition, the amount of net proceeds available for sharing, the elapse of time for Departmental approval of equitable sharing requests for cases with asset values exceeding $1 million, and appeal of forfeiture judgments.  Because of uncertainties surrounding the timing and amount of any equitable sharing payment, an obligation and expense are recorded only when the actual disbursement of the equitable sharing payment is imminent.  The anticipated equitable sharing allocation level for FY 2008 is $400 million.

Analysis of Change in Forfeited Property:

Pursuant to Federal Financial Accounting and Auditing Technical Release 4, “Reporting on Non-Valued Seized and Forfeited Property,” the value of forfeited property with no legal market in the United States (e.g., weapons, chemicals, drug paraphernalia, gambling devices, etc.) is not included in the net forfeited property value, although the item count of these non-valued items is disclosed.  Only AFF/SADF reports forfeited property.

The number of items represents quantities calculated using many different units of measure.  The adjustments for FYs 2007 and 2006 include property status and valuation changes received after, but properly credited to FYs 2006 and 2005, respectively.  The valuation changes include updates and corrections to an asset’s value recorded in a prior year.

For the Fiscal Year Ended September 30, 2007

For the Fiscal Year Ended September 30, 2006

Method of Disposition of Forfeited Property:

During FYs 2007 and 2006, $482,158 and $106,914 of forfeited property were sold, $22 and $1,230 were destroyed or donated, $13,666 and $33,431 were returned to owners, and $16,072 and $35,676 were disposed of by other means, respectively. Other means of distribution include property transferred to other federal agencies for official use or equitable sharing, property distributed to a state or local agency, or property that is destroyed.

Analysis of Change in Seized Property:

Property seized for any purpose other than forfeiture and held by the seizing agency or a custodial agency should be disclosed by the seizing agency. All property seized for forfeiture, including property with evidentiary value, will be reported by the AFF/SADF. The Department has established a reporting threshold of $1,000 or more for Personal Property seized for evidentiary purposes.

A seizure is the act of taking possession of goods in consequence of a violation of public law. Seized property consists of seized cash, monetary instruments, real property and tangible personal property in the actual or constructive possession of the seizing and the custodial agencies. The Department, until judicially or administratively forfeited, does not legally own such property. Seized evidence includes cash, financial instruments, non-monetary valuables, firearms, explosives, tobacco, alcohol, and illegal drugs. The AFF/SADF reports property seized for forfeiture and the FBI, DEA, and ATF report property seized for evidence.

Pursuant to Federal Financial Accounting and Auditing Technical Release 4, “Reporting on Non-Valued Seized and Forfeited Property,” the value of seized property with no legal market in the United States (e.g., explosives, chemicals, drug paraphernalia, gambling devices, etc.) is not included in the net seized property value, although the item count of non-valued items is disclosed. The gross value of seized property, less estimated liens, equals the net seized property value.

The adjustments for FYs 2007 and 2006 include property status and valuation changes received after, but properly credited to FYs 2006 and 2005, respectively. The valuation changes include updates and corrections to an asset’s value recorded in a prior year.

For the Fiscal Year Ended September 30, 2007

For the Fiscal Year Ended September 30, 2006

Method of Disposition of Seized Property:

During FYs 2007 and 2006, $1,424,097 and $764,526 of seized property were forfeited, $108,312 and $99,494 were returned to parties with a bonafide interest, and $22,272 and $32,261 were disposed of by other means, respectively.  Other means of disposition include seized property that is sold, converted to cash, or destroyed.

Analysis of Drug Evidence:

The DEA, FBI, and ATF have custody of illegal drugs taken as evidence for legal proceedings.  In accordance with Federal Financial Accounting and Auditing Technical Release No. 4, “Reporting on Non-Valued Seized and Forfeited Property,” the Department reports the total amount of seized drugs by quantity only, as illegal drugs have no value and are destroyed upon resolution of legal proceedings.

Analyzed drug evidence represents actual laboratory tested classification and weight in kilograms (KG).  Since enforcing the controlled substances laws and regulations of the United States is a primary mission of the DEA, the DEA reports all analyzed drug evidence regardless of seizure weight.  However, the enforcement of these laws and regulations is incidental to the missions of the FBI and ATF and therefore they only report those individual seizures exceeding 1 kilogram in weight.  The following table represents analyzed drug evidence activity:

For the Fiscal Year Ended September 30, 2007

For the Fiscal Year Ended September 30, 2006

Bulk drug evidence is comprised of controlled substances housed by the DEA in secured storage facilities of which only a sample is taken for laboratory analysis.  The actual bulk drug weight may vary from seizure weight due to changes in moisture content over time.  The following table presents the bulk drug evidence activity.

For the Fiscal Years Ended September 30, 2007 and 2006
(Amounts in KG)

Unanalyzed drug evidence is qualitatively different from analyzed and bulk drug evidence because unanalyzed drug evidence includes the weight of packaging and drug categories are based on the determination of Special Agents instead of laboratory chemists.  For these reasons, unanalyzed drug evidence is not reported by the Department.

Note 9. General Property, Plant and Equipment, Net

Items are generally depreciated using the straight-line method.

As of September 30, 2007

As of September 30, 2006

Note 10.  Other Assets

As of September 30, 2007 and 2006

Other Assets With the Public primarily consist of farm livestock held by the Bureau of Prisons.

Note 11.  Liabilities not Covered by Budgetary Resources

As of September 30, 2007 and 2006

Generally, liabilities not covered by budgetary resources are liabilities for which Congressional action is needed before budgetary resources can be provided.  However, some liabilities do not require appropriations and will be liquidated by the assets of the entities holding these liabilities.  Such assets include civil and criminal debt collections, seized cash and monetary instruments, and revolving fund operations.

Note 12.  Debt

In FY 1998, Congress granted FPI borrowing authority pursuant to Public Law 100-690.  Under this authority, FPI borrowed $20,000 from the Treasury with an extended lump-sum maturity date of September 30, 2008.  The funds received under this loan were internally restricted for use in the construction of plant facilities and the purchase of equipment.  The loan accrues interest, payable March 31 and September 30 of each year, at 5.5% (the rate equivalent to the yield of Treasury obligations of comparable maturities which existed on the date of the loan extension).  Accrued interest payable under the loan is either fully or partially offset to the extent the non-interest bearing cash deposits are maintained with the Treasury.  In this regard, there is no accrual of interest unless the cash balance, on deposit with the Treasury, falls below $20,000.  When this occurs, interest is calculated on the difference between the loan amount ($20,000) and the cash balance.

The loan agreement provides for certain restrictive covenants and a prepayment penalty for debt retirements prior to FY 2008.  Additionally, the agreement limits authorized borrowings in an aggregate amount not to exceed 25% of the FPI’s net equity.  There were no net interest expenses for the fiscal years ended   September 30, 2007 and 2006, respectively.

Note 13.   Environmental and Disposal Liabilities

The DEA owned a section of land located in Chicago, Illinois.  Soil samples taken from this land, after the removal of underground storage tanks, indicated levels of benzene, ethyl benzene, and lead that were above soil remediation standards.  Phase I of an environmental site assessment was conducted on January 15, 2002, for this site.  The assessment revealed evidence of a potential environmental condition and recommended the study be extended to determine the extent of the contamination.  Phase II of the environmental site assessment was completed in FY 2003 and filed with the Illinois Environmental Protection Agency.  This assessment indicated that the soil contained lead.  The Illinois Environmental Protection Agency requested further testing in order to define the limits of the impacted soil and groundwater.  The GSA completed the additional tests and provided a copy to the City of Chicago, which expressed an interest in purchasing the property.  GSA took the position that the lead was associated with petroleum product contamination on the property that is not subject to the Comprehensive Environmental Recovery, Compensation and Liability Act (CERCLA).  On June 18, 2007 DEA sold this section of land to the City of Chicago for its re-conveyance to a developer for the purchase price of $850.  Under the Property Act of 1949, the proceeds from sale are deposited into the Department of the Interior’s Land and Water Conservation Fund.  As outlined in a separate environmental agreement, the developer is responsible for all petroleum clean up on the property and for obtaining approval from the Illinois Environmental Protection Agency.

The BOP operates firing ranges on 64 of the sites where its institutions are located.  Use of these firing ranges generates waste consisting primarily of lead shot and spent rounds from rifles, shotguns, pistols, and automatic weapons.  At operational firing ranges, lead-containing bullets are fired and eventually fall to the ground at or near the range.  As of September 30, 2007, BOP management recorded an estimated cleanup liability of $22,112.

Note 14.  Leases

Capital leases include a Federal Detention Center (25 year lease term) in Oklahoma City, Oklahoma; an airplane hangar (20 year lease term) in Oklahoma City, Oklahoma; and a training facility (16 year lease term) in Pineville, Louisiana; and certain machinery, vehicles and office equipment under noncancelable capital and operating lease agreements that expire over future periods.

As of September 30, 2007 and 2006

Capital Leases

The net capital lease liability not covered by budgetary resources primarily represents the capital lease of the Federal Detention Center for which the Department received congressional authority to fund with annual appropriations.

Future Capital Lease Payments Due

Operating leases have been established for multiple years.  Many of the operating leases that expire over an extended period of time include an option to purchase the equipment at the current fair market value, or to renew the lease for additional periods.

Operating Lease Expenses

Future Noncancelable Operating Lease Payments Due

Note 15.  Seized Cash and Monetary Instruments

The Seized Cash and Monetary Instruments represent liabilities for seized assets held by the Department pending disposition.

As of September 30, 2007 and 2006

Note 16.  Other Liabilities

As of September 30, 2007 and 2006

Intragovernmental other liabilities primarily represent civil debt collections where the Treasury General Fund is designated as the recipient of either a portion of a collection or the entire amount of a collection.

Note 17.  Contingencies and Commitments

The Department is party to various administrative proceedings, legal actions, and claims.  The balance sheet includes an estimated liability for those legal actions where the management and Chief Counsel consider adverse decisions “probable” and the amounts are reasonably estimable. For those legal actions where the management and Chief Counsel consider adverse decisions “reasonably possible” and amounts are reasonably estimable information is disclosed below.  However, there are cases where amounts have not been accrued or disclosed below because the amounts of the potential loss cannot be estimated or the likelihood of an unfavorable outcome is less than reasonably possible.

Note 18. Earmarked Funds

Earmarked funds are financed by specifically identified revenues and are required by statute to be used for designated activities or purposes, and must be accounted for separately from the Government’s general revenues.  See SFFAS 27, “Identifying and Reporting Earmarked Funds,” for the required criteria for an earmarked fund.

As of and for the Fiscal Year Ended September 30, 2007

As of and for the Fiscal Year Ended September 30, 2006

The Comprehensive Crime Control Act of 1984 established the AFF to receive the proceeds of forfeiture and to pay the costs associated with such forfeitures, including the costs of managing and disposing of property, satisfying valid liens, mortgages, and other innocent owner claims, and costs associated with accomplishing the legal forfeiture of the property.  Authorities of the fund have been amended by various public laws enacted since 1984.  Under current law, authority to use the fund for certain investigative expenses shall be specified in annual appropriation acts.  Expenses necessary to seize, detain, inventory, safeguard, maintain, advertise or sell property under seizure are funded through a permanent, indefinite appropriation.  In addition, beginning in
FY 1993, other general expenses of managing and operating the Asset Forfeiture Program are paid from the permanent, indefinite portion of the fund.  Once all expenses are covered, the balance is maintained to meet ongoing expenses of the program.  Excess unobligated balances may also be allocated by the Attorney General in accordance with 28 U.S.C. 524(c)(8)(E).

United States trustees supervise the administration of bankruptcy cases and private trustees in the Federal Bankruptcy Courts. The Bankruptcy Judges, U.S. Trustees and Family Farmer Bankruptcy Act of 1986 (Public Law 99–554) expanded the pilot trustee program to a twenty-one region, nationwide program encompassing 88 judicial districts. The U.S. Trustee System Fund collects user fees assessed against debtors, which offset the annual appropriation.

The Antitrust Division administers and enforces antitrust and related statutes. This program primarily involves the investigation of suspected violations of the antitrust laws, the conduct of civil and criminal proceedings in the federal courts, and the maintenance of competitive conditions.  The Antitrust Division collects filing fees for pre-merger notifications and retains these fees for expenditure in support of its programs.

The Crime Victims Fund is financed by collections of fines, penalty assessments, and bond forfeitures from defendants convicted of federal crimes. This fund supports victim assistance and compensation programs around the country and advocates, through policy development, for the fair treatment of crime victims. The Office for Victims of Crime administers formula and discretionary grants for programs designed to benefit victims, provides training for diverse professionals who work with victims, develops projects to enhance victims' rights and services, and undertakes public education and awareness activities on behalf of crime victims.

The Diversion Control Fee Account is established in the general fund of the Treasury as a separate account.  Fees charged by the Drug Enforcement Administration under the Diversion Control Program are set at a level that ensures the recovery of the full costs of operating this program. The program’s purpose is to prevent, detect, and investigate the diversion of controlled substances from legitimate channels, while ensuring an adequate and uninterrupted supply of controlled substances required to meet legitimate needs.

The Federal Prison Commissary Fund was created in the early 1930s to allow inmates a means to purchase additional products and services above the necessities provided by appropriated federal funds, e.g. personal grooming products, snacks, postage stamps, and telephone services.  The Trust Fund is a self-sustaining trust revolving fund account that is funded through sales of goods and services to inmates.

Note 19. Net Cost of Operations by Suborganization

Intragovernmental costs and exchange revenue represent transactions made between two reporting entities within the federal government.  The classification of revenue or cost as “intragovernmental” is defined on a transaction-by-transaction basis.  The purpose of this classification is to enable the federal government to prepare consolidated financial statements, not to match intragovernmental revenue with the costs incurred to produce intragovernmental revenue.

Note 20. Imputed Financing from Costs Absorbed by Others

Imputed Inter-Departmental Financing Sources are the unreimbursed (i.e., non-reimbursed and under-reimbursed) portion of the full costs of goods and services received by the Department from a providing entity that is not part of the Department of Justice.  Imputed Inter-Departmental financing sources currently recognized by the Department include the actual cost of future benefits for the Federal Employees Health Benefits Program (FEHB), the Federal Employees’ Group Life Insurance Program (FEGLI), and the Federal Pension plans that are paid by other Federal entities.  The Treasury Judgment Fund was established by the Congress and funded at 31 U.S.C. 1304 to pay in whole or in part the court judgments and settlement agreements negotiated by the Department on behalf of agencies, as well as certain types of administrative awards.  FASAB Accounting Standard Interpretation No. 2, “Accounting for Treasury Judgment Fund Transactions,” requires agencies to recognize liabilities and expenses when unfavorable litigation outcomes are probable and the amount can be estimated and will be paid by the Treasury Judgment Fund.

SFFAS No. 5, “Accounting for Liabilities of the Federal Government,” requires that employing agencies recognize the cost of pensions and other retirement benefits during their employees’ active years of service.  SFFAS No. 5 requires OPM to provide cost factors necessary to calculate cost.  OPM actuaries calculate the value of pension benefits expected to be paid in the future, and then determine the total funds to be contributed by and for covered employees, such that the amount calculated would be sufficient to fund the projected pension benefits.  For employees covered by Civil Service Retirement System (CSRS), the cost factors are 25% of basic pay for regular, 40.3% law enforcement officers, 19.5% regular offset, and 35.7% law enforcement officers offset.  For employees covered by Federal Employees Retirement System (FERS), the cost factors are 12% of basic pay for regular and 25.1% for law enforcement officers.

The cost to be paid by other agencies is the total calculated future costs, less employee and employer contributions.  In addition, other retirement benefits, which include health and life insurance that are paid by other Federal entities, must also be disclosed.

For the Fiscal Years Ended September 30, 2007 and 2006

Imputed Intra-Departmental Financing Sources as defined in SFFAS No. 4, “Managerial Cost Accounting Standards and Concepts,” are the unreimbursed portion of the full costs of goods and services received by a Department component from a providing entity that is part of the Department.  Recognition is required for those transactions determined to be material to the receiving entity.  The determination of whether the cost is material requires considerable judgment based on the specific facts and circumstances of each type of good or service provided.  SFFAS No. 4 also states that costs for broad and general support need not be recognized by the receiving entity, unless such services form a vital and integral part of the operations or output of the receiving entity.  Cost are considered broad and general if they are provided to many, if not all, reporting components and not specifically related to the receiving entity’s output.  The FPI imputed $24,957 and $25,823 for FYs 2007 and 2006, respectively of unreimbursed costs for BOP warehouse space used in the production of goods by the FPI and for managerial and operational services BOP provided to FPI.  These imputed costs have been eliminated from the consolidated financial statements.

Note 21. Information Related to the Statement of Budgetary Resources

Apportionment Categories of Obligations Incurred:

Per OMB Circular A-11, Category A obligations represent resources apportioned for calendar quarters. Category B obligations represent resources apportioned for other time periods; for activities, projects, and objectives or for a combination thereof.

Status of Undelivered Orders:

Undelivered Orders (UDO) represents the amount of goods and/or services ordered, which have not been actually or constructively received.  This amount includes any orders which may have been prepaid or advanced but for which delivery or performance has not yet occurred.

As of September 30, 2007 and 2006

Permanent Indefinite Appropriations:

A permanent indefinite appropriation is open-ended as to both its period of availability (amount of time the agency has to spend the funds) and its amount.   Following are the Department’s permanent indefinite appropriations.

• 28 U.S.C. '524(c)(4) authorized the Attorney General to retain AFF receipts to pay operations expenses, equitable sharing to state and local law enforcement agencies who assist in forfeiture cases, and lien holders.
  
  
• On October 5, 1990, Congress passed the Radiation Exposure Compensation Act ("RECA" or "the Act"), 42 U.S.C. § 2210 note, providing for compassionate payments to individuals who contracted certain cancers and other serious diseases as a result of their exposure to radiation released during above-ground nuclear weapons tests or as a result of their exposure to radiation during employment in underground uranium mines. Implementing regulations were issued by the Department of Justice and published in the Federal Register on April 10, 1992. These regulations established procedures to resolve claims in a reliable, objective, and non-adversarial manner, with little administrative cost to the United States or to the person filing the claim. Revisions to the regulations, published in the Federal Register on March 22, 1999, served to greater assist claimants in establishing entitlement to an award. On July 10, 2000, P.L. 106-245, the Radiation Exposure Compensation Act Amendments of 2000 ("the 2000 Amendments") were passed. On November 2, 2002, the President signed the "21st Century Department of Justice Appropriation Authorization Act" (P.L. 107-273). Contained in the law were several provisions relating to RECA. While most of these amendments were "technical" in nature, some affected eligibility criteria and revised claims adjudication procedures. The Consolidated Appropriations Act, 2005 provides a permanent indefinite appropriation for the OBDs’ Radiation Exposure Compensation Act program beginning FY 2006.
  
  
• Congress established the Federal Prison Commissary Fund (Trust Fund) in 1932 to allow inmates a means to purchase additional products and services above the necessities provided by appropriated federal funds.  The BOP Trust Fund is now a self-sustaining revolving account that is funded through the sales of goods and services, rather than annual or no-year appropriations.

Legal Arrangements Affecting Use of Unobligated Balances:

Unobligated balances represent the cumulative amount of budget authority that is not obligated and that remains available for obligation under law, unless otherwise restricted. The use of unobligated balances is restricted based on annual legislation requirements and other enabling authorities. Funds are appropriated on an annual, multi-year, and no-year basis. Appropriated funds shall expire on the last day of availability and are no longer available for new obligations. Unobligated balances in unexpired fund symbols are available in the next fiscal year for new obligations unless some restrictions had been placed on those funds by law. Amounts in expired fund symbols are unavailable for new obligations, but may be used to adjust previously established obligations.

Statement of Budgetary Resources vs Budget of the United States Government:

The reconciliation as of September 30, 2006 is presented below.  The reconciliation as of September 30, 2007 is not presented, because the submission of the Budget of the United States (Budget) for FY 2009, which presents the execution of the FY 2007 budget, occurs after publication of these financial statements.  The Department of Justice Budget Appendix can be found on the OMB website (http://www.whitehouse.gov/omb/budget) and will be available in early February 2008.

Other differences represent financial statement adjustments, timing differences and other immaterial differences between amounts reported in the Department SBR and the Budget of the United States.

In addition to the reconciliation above, a reconciliation with the SF-133, “Report on Budget Execution and Budgetary Resources,” was also performed and confirmed that differences between the Statement of Budgetary Resources and the SF-133 are also the result of the adjustments identified above.

Note 22. Explanation of Differences Between Liabilities not Covered by Budgetary Resources and Components of Net Cost of Operations Requiring or Generating Resources in Future Periods

Liabilities that are not covered by realized budgetary resources and for which there is not certainty that budgetary authority will be realized, such as the enactment of an appropriation, are considered liabilities not covered by budgetary resources.  These liabilities totaling $2,566,502 and $2,442,058 on September 30, 2007 and 2006, respectively, are discussed in Note 11, “Liabilities not Covered by Budgetary Resources.”  Decreases in these liabilities result from current year budgetary resources that were used to fund expenses recognized in prior periods.  Increases in these liabilities represent unfunded expenses that were recognized in the current period.  These increases along with the change in the portion of exchange revenue receivables from the public, which are not considered budgetary resources until collected, represent components of current period net cost of operations that will require or generate budgetary resources in future periods.  The changes in liabilities not covered by budgetary resources and receivables generating resources in future periods are comprised of the following:

Note 23. Allocation Transfers of Appropriation

During FYs 2007 the Department transferred $17,000 from the Crime Victims Fund to the Department of Health and Human Services (HHS).  The same amount was transferred in FY 2006.  This transfer is required by law and is used for child abuse prevention and treatment grants.  Amounts made available by section §10601(d)(2) of this title, for the purposes of this section, shall be obligated and expended by the Secretary of HHS for grants under section §5106c of this title. 

The Department also allocated funds from BOP to the Public Health Service (PHS).  PHS provides a portion of medical treatment for federal inmates.  The money is designated and expended for current year obligation of PHS staff salaries, benefits, and applicable relocation expenses.  The amounts transferred to PHS from BOP totaled $68,000 and $66,000 for the fiscal years ended September 30, 2007 and 2006, respectively, and the related activity is included as part of the these financial statements.

The USMS receives allocation transfers of appropriation from the Administrative Office of U.S. Courts (AOUSC).  However, the AOUSC is not an Executive Branch entity and is not required to report annual financial statements.  The USMS is the child in the allocation transfer, but per OMB guidance, all activity relative to these allocation transfers is reported in the USMS financial statements. The allocation transfers are used for costs associated with protective guard services - Court Security Officers (CSOs) at United States courthouses and other facilities housing federal court operations.  These costs include their salaries (paid through contracts), equipment, and supplies.  This transfer is performed on an annual basis.

Note 24.   Net Custodial Revenue Activity

Custodial revenue activity represents those collections of non-exchange revenue on behalf of other recipient entities.  These collections are not recorded as revenue by the Department but as activity on the Statement of Custodial Activity.   The custodial liabilities presented on the Consolidated Balance Sheet and Note 16 represent funds held by the Department that have yet to be disbursed to the appropriate federal agency or individual.

The OBDs collects funds on behalf of federal agencies and other aggrieved parties through the financial litigation activities of the Department.  Currently, the primary sources of collections are civil litigated matters (i.e., student loan defaults, health care fraud, etc.).

The Debt Accounting Operations Group (DAOG) also processes certain payments on criminal debts as accommodations for the BOP and the Clerks of the U.S. District Courts. The BOP aggregates inmate criminal debt payments by correction facility, and the DAOG re-sorts the payments by judicial district and disburses these payments to the respective Clerks of the U.S. District Court.  The DAOG also accepts wire transfers or other payments on a criminal debt if a Clerk of the U.S. District Court is unable or unwilling to do so.

The OBDs collect civil fines, penalties, and restitution payments that are incidental to its mission.  By court order, the OBDs were given the investment authority and the settlement funds collected must be invested.  The OBDs invest these funds with the U.S. Department of Treasury, Bureau of the Public Debt.  As of September 30, 2007 and 2006, the custodial assets and liabilities recorded by the OBDs on the balance sheet are $1,017,222 and $337,623, respectively.  The OBDs custodial collections totaled $3,075,294 and $4,088,130 for the fiscal years ended September 30, 2007 and 2006. 

DEA’s collections include $15 million of the total fees collected in excess of the cost of operation the Diversion Control Program and civil monetary penalties related to violations of the Controlled Substances Act that were incidental to DEA’s mission.  Since DEA has no statutory authority to use these excess funds, DEA transmits them to the U.S. Treasury’s General Fund.

As an agent of the federal government and as authorized by 26 U.S.C. § 6301, ATF collects fees from firearms and explosives industries, as well as import, permit and license fees.  In addition, Special Occupational Taxes are collected from certain firearms businesses.  As ATF is unable to use these collections in its operations, ATF also has the authority to transfer these collections to the Treasury General Fund.

Note 25.  OMB Circular A-136 Consolidated Balance Sheet Presentation

Note 26. Reconciliation of Net Cost of Operations (proprietary) to Budget (formerly the Statement of Financing)

The Department changed its method of reporting the reconciliation of the Net Cost of Operations to budgetary resources during FY 2007. Effective FY 2007 and in accordance with OMB Circular A-136, the Statement of Financing is no longer considered a basic statement. In previous years, this reconciliation was accomplished by presenting the Statement of Financing as a basic financial statement.

For the Fiscal Years Ended September 30, 2007 and 2006

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